Saudi Arabia produced 10.3 million barrels per day in the month of March, a 658,000 barrel-per-day increase over the previous month. That is the highest level of production in three decades for the leading OPEC member. On top of the Saudi increase, Iraq boosted output by 556,000 barrels per day, and Libya succeeded in bringing 183,000 barrels per day back online. OPEC is now collectively producing nearly 31.5 million barrels per day, well above the cartel’s stated quota of just 30 million barrels per day.
The enormous increase in production comes into a market that is still dealing with extraordinarily low prices. The move could be interpreted as a stepped up effort on behalf of Saudi Arabia to maintain market share at all costs. More output will prolong the slump in oil prices, which will force even more U.S. shale production out of the market. The signs of success are already showing – the U.S. is set to lose 57,000 barrels per day in production in May, and rig counts are still falling.
The increase in Saudi production would also suggest that global markets are well-supplied. But, more Saudi oil comes at the cost of a shrinking global spare capacity. Saudi Arabia is essentially the only oil producer that has significant slack production capabilities, which can be ramped up or down depending on market conditions. That is what has allowed Saudi Arabia to influence prices to its liking for so many years. But when the Kingdom produces near flat out, it starts to run out of ammo. It is kind of like a central bank running interest rates near zero – once you are at that point, you run out of tools in the event that you need to do more.
OPEC’s actual levels of spare capacity are somewhat opaque, which makes estimates difficult. But Saudi Arabia producing at its highest level in three decades certainly eats into that reserve. Moreover, Saudi Arabia typically consumes more oil in the summer for domestic purposes, which could further shrink spare capacity in the months ahead. PIRA Energy Group warned of such a scenario in its latest weekly oil report. “Incremental Saudi crude burn demand could push its volume this summer to levels that would substantially reduce global spare capacity, at a time when oil markets will be tighter and geopolitical risks to supply are growing,” PIRA wrote on April 14. Spare capacity may shrink to just 1.7 million barrels per day.
Saudi Arabia is succeeding in pushing out U.S. shale production, but in the meantime, the world is getting hooked on low prices. Oil demand is growing quickly – the IEA predicts global demand will jump from 92.66 million barrels per day in the second quarter up to 94.67 million barrels per day in the fourth quarter.
That will put oil markets in an interesting situation. U.S. production will continue to shrink as the year goes on and Saudi Arabia will have very little spare capacity. If a supply disruption occurs somewhere – more loss of Libyan oil, violence in the Middle East, or a faster-than-expected drop off in U.S. production – the Saudis will be left with little firepower to control a price spike (not that a price spike would necessarily be bad for them).
There is an argument that U.S. shale has emerged as a sort of collective swing producer – shale operations ramp up and down much quicker than conventional drilling. But they don’t turn on and off that quickly. They can’t mimic the latent supply that the Saudi’s have in their back pocket. Furthermore, shale production is the result of drilling by hundreds of companies, and future investments and drilling will be made by private individuals based on individual financial circumstances, as opposed to state-level geostrategic calculations.
In other words, shale producers, now that they are shrinking their footprints and production levels, will not be able to step up to the plate in a pinch. If global supplies shrink unexpectedly, and Saudi Arabia has run down its spare capacity to low levels, oil markets will tighten to a precarious point.
Speculawyer on Fri, 17th Apr 2015 9:07 pm
I’m amazed that people think Saudi Arabia has that much control over the market. They don’t.
SugarSeam on Sat, 18th Apr 2015 12:39 am
decline by the end of this year … mark it down, dude
shortonoil on Sat, 18th Apr 2015 7:35 am
The shale industry had already lost a $trillion before the the price collapsed last year. There was certainly no need for Saudi Arabia to force prices down to put them out of business. They were already headed that way. For the Saudis to forgo $190 billion per year in revenue just to speed that process up by a few months makes absolutely no sense.
The petroleum industry is now between a rock and a hard spot. Consumer affordability is going down, and production costs are going up; the price of oil is following:
http://www.thehillsgroup.org/depletion2_022.htm
It is becoming ever more difficult for the industry to make a profit producing oil. Depletion is taking its pound of flesh. At some point it will become impossible, and that is the last thing that the industry is going to admit. As profits shrink, and the industry shrivels the corporate shrills will continue to blame the falling dollar, the rising dollar, Saudi overproduction, Shale, the Central Banks, Middle East instability, Washington interference, and the weather. Implying that once these things are resolved that EXXON will once again post a huge dividend to its stockholders. But, the day of ultra rich oil is coming to its end. The day of fat profit and loss statements, and growing balance sheets is over. We have long since extracted the oil that gave those enriching results. The rest is the end game!
http://www.thehillsgroup.org
BobInget on Sat, 18th Apr 2015 10:23 am
All the reasons shortonoil gives are valid ones. It’s only conclusions where we disagree. “These things” (list of ‘excuses) will,
one-at-a-time, over the next 20 years be resolved.
Saudi overproduction is, in itself, self healing.
Despite Russian, Chinese, US congressional efforts, the almighty Buck has at least two more decades of dominance.
God’s joke, putting ‘our oil’ in the Middle East
gets funnier by the hour. Persian and Arab states plus North Africa and Israel still have another 20 years to duke it out, destroying each other trying.
In the mean-time, China and India, not directly involved, grab every available exportable barrel paying in everything from dollars to trading beads.
‘Weather’, more accurately, ‘climate’ continues to be our biggest, ‘Catch 22. Burn up more oil,
AGW worsens, Burn none, famine.
It appears we have two choices, starve ourselves
or our children and grandchildren.
It appears, most folks are prepared to deny both premise. Instead, EIA, IEA, are looking at consumption numbers topping 100 million barrels per day. (I’m absolutely confident ‘the oil industry’ will, at some wildly inflated cost, supply that number till ‘the lights go out’.
When long gone off patent, generic prescription meds cost more NOW then when they were Branded, (because Americans need them), it’s laughable to believe 2.5 Billion ChinIndians give up gasoline while personal transportation exists.
Hundreds die of gunshots daily, we buy more guns every year.
When a US Congress, to placate a shrinking base, denies abortion funding to trafficking victims, poor women birth control, there’s little hope of containing population growth.
AGW, Agriculture, Peak Oil, ZPG =One Package.
baptised on Sat, 18th Apr 2015 11:00 am
Could it be that “the power in Washington DC”, don’t want to show their hand, just like in poker. By shutting in fracked oil, politicans can say “look at all of our reserves”, while if we had consumed all the fracked oil(5-10 years) we are totally naked politically speaking. Of course Saudais had to go along with this. Just a thought?
baptised on Sat, 18th Apr 2015 11:00 am
Could it be that “the power in Washington DC”, don’t want to show their hand, just like in poker. By shutting in fracked oil, politicans can say “look at all of our reserves”, while if we had consumed all the fracked oil(5-10 years) we are totally naked politically speaking. Of course Saudais had to go along with this. Just a thought?
baptised on Sat, 18th Apr 2015 11:02 am
Sorry for double post I am not sure what happen.